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Fed Officials Divided on Bond Buys

By Jon Hilsenrath, Jeffrey Sparshott

A new fault line has opened up at the often-divided Federal Reserve: When to halt the bond-buying programs that are adding $85 billion a month of Treasury and mortgage securities to the central bank’s assets.

Minutes of the Fed’s Dec. 11-12 policy meeting showed that officials were divided about when to halt the programs, with a few wanting to continue them until year-end, several others wanting to end the programs well before then and some wanting to halt them right away.

While exposing the rift, the minutes left little clear indication which course the central bank would choose. In its official policy statement, it has been saying since September that it would continue the bond-buying programs until the job market substantially improves.

“A few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013,” the minutes said. A few others called broadly for “considerable policy accommodation” without specifying a date, while several others “thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013.” The minutes also held out mid-year as a possible end-point.

The Fed is often intentionally vague in meeting minutes and other documents to assure the officials have room to maneuver as circumstances and their outlooks change.

The next decision on bond buying is hugely consequential and likely the next big challenge for Ben Bernanke in what could be his final year at the helm of the central bank, where he has been chairman since 2006.

If the Fed buys bonds at the current pace through the end of the year, it will be expanding its $2.9 trillion portfolio by another $1.02 trillion. Ending the program could send shockwaves through markets, which have grown accustomed to repeated Fed stimulus.

Officials believe the programs help to push down long-term interest rates, drive investors into stocks and other risky assets, and spur investment, spending and borrowing to get the economy going. But the Fed made clear in the minutes released Thursday that officials remain preoccupied with uncertainties about the benefits of the programs, and their potential costs.

“While almost all members thought that the asset-purchase program begun in September had been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased,” the minutes showed.

Officials appear to be focused on three potential endpoints for the program, with one cluster of officials centered on mid-year, another cluster around year-end and the policy hawks, who are in a minority and oppose the program, wanting to end it right away.

Among those who want to continue, “participants were approximately evenly divided between those who judged that it would likely be appropriate for the [Fed] complete its asset purchases sometime around the middle of 2013 and those who judged that it would likely be appropriate for the asset purchases to continue beyond that date,” the minutes said.

Though the Fed has tied its decision to the performance of the labor market, it hasn’t set down firm benchmarks for how it will judge whether the labor market has improved “substantially.”

In a September news conference, Mr. Bernanke said, “We’re looking for something that involves unemployment coming down in a sustained way, not necessarily a rapid way, because I don’t know if our tools are that strong, but we’d like to see an economy which is strong enough that it will support improving labor market conditions and unemployment that’s declining gradually over time.”

The unemployment rate dropped from 8.3% in July to 7.7% in November, but throughout the recovery it has moved in fits and starts. The Labor Department will report the unemployment rate for December on Friday. Officials also are looking at other indicators, including payroll employment growth, overall economic growth and labor force participation.

Write to Jon Hilsenrath and Jeffrey Sparshott at jon.hilsenrath@dowjones.com